World-changing trends can start anywhere in the world today.

Because the social media platforms evolved differently in Northeast Asia, e-commerce developed differently as well. And because of recent shifts in regulation and social attitudes, Western social media is going to start to look a lot more like it does in Aisa, and e-commerce trends will follow.

Today Masa Shimizu, founder of Zeals, explains the origins and structure of chat-commerce and how it might lead to a friendlier, more enjoyable, and more profitable internet.

It’s a great conversation, and I think you’ll enjoy it.

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Show Notes

  • An introduction to chat commerce
  • How to teach a support chatbot to sell
  • What the death or retargeting means for chat commerce
  • Why some university startups get support, mentoring, and funding but and others do not
  • $39 M fundraise in equity and debt, and why that’s becoming a popular model
  • Why Asian social media evolved differently
  • Why Facebook and Instagram are about to become more chat-like
  • How Japanese VC discourage startups from going global

Links from the Founder

 

Transcript

Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs.

I’m Tim Romero and thanks for joining me.

Today, we are going to talk about a 290 billion eCommerce trend that is sweeping through Northeast Asia, but hasn’t taken off in the US or Europe. Well, at least not yet. 

You and I are going to sit down with Masa Shimizu, founder and CEO of Zeals. And we’re going to talk about Chat Commerce. Now Masa will explain this structural reasons that this has been so popular in Japan, China, and Korea, and why it’s about to take off in the West. 

And it’s not just Masa and me saying so, Zeals just raised 39 million to fund their US expansion. So, this is a trend you need to know about. 

We also talk a lot about the Japanese concept of Omotenashi, which is usually translated as hospitality and yeah, kind of, I mean, that’s probably the closest word we have for it in English, but there’s more to it than that. It’s kind of obsession and a giving of yourself honestly and wholeheartedly to make your guests comfortable and satisfied. It’s kind of a satisfaction and happiness that you get from making your guests happy. 

So, Masa and I talk about Omotenashi, about a structural change coming to global social network platforms. How we can get more Japanese startups to go global and why the third party cookie ban means the death of retargeting and the birth of the Chat Commerce boom. 

But Masa tells that story much better than I can. So, let’s get right to the interview. 

Interview 

Tim: I’m sitting here with Masa Shimizu the founder and CEO of Zeals, who is a driving force behind Chat Commerce. So, thanks for sitting down with us.

Masa: Thank you for reaching out.

Tim: To start out with, what is Chat Commerce?

Masa: Chat Commerce is next eCommerce innovations. So, on eCommerce website many people feel concerned to purchase online, especially expensive items or complex items. We can support through communication experience and we believe this is Omotenashi experience. Omotenashi is Japanese word which means hospitality. It’s very exciting and helpful experience I think.

Tim: So, when you’re talking about Chat Commerce is this interaction over social media? Is this interaction over like chat at corporate websites? What’s the main channel where this conversation is taking place?

Masa: Mainly is SNS. In Japan case, line platform is most important because many people use this platform. And as a country, other channel is very important. The example, WhatsApp, Facebook Messengers, WeChat and Instagram and so on.

Tim: Okay. That makes — and its funny people coming into the Japanese market often underestimate the importance that line plays in social media in Japan. It’s huge.

Masa: Yeah. Yeah.

Tim: So, yeah, let’s walk through an example from the customer’s point of view. So, would a consumer start out by just saying, you know, I’d really like a new pair of shoes. Does anyone have any advice? How does the interaction start?

Masa: Start point is website or Instagram case, Instagram story, if it a post or advertisement. So, user watch advertisement and click list, typical eCommerce experience, jump website. But Chat Commerce case user watch advertisement and the click list, jump chat experience and communication and understand item and buy item from chat.

Tim: Well, that makes sense because in that way it’s maintaining this social network experience rather than having to transition to a eCommerce experience or a website experience.

Masa: Yes. Yes. So, this Chat Commerce experience have been invented and spread from Asia market. It very unique progress I think.

Tim: Later on, I really want to dig down on why this seems to be so unique to Asia, but right now, like just understanding the flow so we keep the user, the potential consumer in a social media framework, in a mindset. And are they chatting with a chatbot or are they chatting with people or is it a combination of the two? How does that work?

Masa: Important questions. It’s very simple on the chatbot. First timing we provide chatbot and personal chat. We provide both, but we step by step focus on chatbot experience through smart reply. This new experience we invented from now more and more companies focus on only chatbot experience.

Tim: That makes sense from the consumer point of view, but you’ve got over 400 businesses using Zeals now. Tell me about your customers. Why are they using it? What’s a typical use case?

Masa: Example NTT Docomo, the biggest telecom company in Japan and Asahi Beer the top beverage company in Japan and recently Estee Lauder, Mac Cosmetic and enterprises interested in this area. Before Zeals, many enterprises focus on chatbot for customer support. So, inbound areas, FAQ and answer only, but we have opened up outbound area to make conversion through chatbot experience.

Tim: So, I agree chatbots in general tend to be viewed as customer support or maybe some, I don’t know, very light presales at the website type of thing.

Masa: Yes.

Tim: What did you do to change that into a more sales focused, commerce focused application?

Masa: Important background one point is third-party cookie ban. So, retargeting advertisement from our decreasing from now retargeting marketing will be limited by performance.

Tim: That’s a really good point. And for our listeners who are not involved with eCommerce retargeting is when you’ll visit a site and then you’ll see banner ads and display ads for that site for the next two weeks, everywhere you go. And it can be a little creepy but it’s very effective. 

Masa: Yes, or retargeting advertisement is very important for making conversion for any eCommerce customers. So, many eCommerce customers have big concern. What service say we will use about Chat Commerce? We don’t use third party cookie but we can continually communicate with users through Chat Commerce. So, south party cookie bank is a big reason many company starting to use Chat Commerce. And second point line and Instagram and so on, invested a lot of money to grow this account but now those accounts cannot make actual sales only branding engagement. It’s great but cannot make conversion or sales.

Tim: So, if I’m understanding correctly, so one of the big advantages of Chat Commerce is that once a user initiates that conversation, they initiate that chat. You have a direct connection to them either via Facebook messenger or via line messenger. And so you don’t need the retargeting and you don’t need to pay Facebook to promote your post. You have that direct connection. Am I understanding it right?

Masa: Yeah. Our strong point is 3 point. One point is huge conversational insight data for next revenue marketing. And the second is communication design specialist team to making great compensational experience. And the third point is Paypal performance fee business model. So, client use this with no risk. So, many case client have already line accounts or Instagram accounts and we’ll connect with chat commerce.

Tim: All right. I really want to dive into the overall market and the technology, but before we do that, I want to ask a little about you. So, you started Zeals back in 2014 when you were still a student, right?

Masa: Yeah.

Tim: Yeah. Originally you were focused on like robotics or you were doing something different.

Masa: So, I established Zeals when I was a university student in 2014 and the first project was to develop a robot, but to be honest, we couldn’t make this business profitable. This project needed a lot of money. We were very…

Tim: Robotics is so hard. I mean…

Masa: Yes, yes. 

Tim: Was there any one problem or it was just, you didn’t know what you were doing kind of first startup?

Masa: Yeah. So, I think its crazy first project. Yeah, but we ran many things through this project and we transformed robotics technology into communication technology on smartphone and chat.

Tim: Yeah. So, you pivoted just a couple years ago on like 2019 to the chatbots. But before that, like when you were at university, what kind of support did you get from the university? Did they help you on your startup journey? What was that like?

Masa: Yeah, definitely nothing. 

Tim: One of the most interesting things in Japan is the level of support that new founders get at different universities. So, at the university of Tokyo or KO or Kyoto, there’s this huge amount of mentoring and funding support, but you went to a major university, right?

Masa: Yeah. So, 2014, nothing and maybe Kyoto, Keio, Tokyo and so on recently more support for startups I think. They get support by university, but I got nothing.

Tim: So, in 2019, as you mentioned, you made that pivot to chatbots and you recently raised 39 million. So, congratulations.

Masa: Thanks. It’s very tough but Salesforce ventures and the JIC gross venture investment, they’re invested in Zeals. It’s very important for growing Zeals business and conversational commerce market I think.

Tim: I think so. And I’m curious about one aspect of the fundraising. So, you raised about 27 million in equity sales and 11 million in debt. And so these structures, I always find really interesting. So, what was the motivation for doing the 11 million in debt instead of doing it all in equity financing?

Masa: In Japan, step by step become normal, or of course, equity finance is very important and Mitsubishi and Mitsui and Mizuho and so on mega bank, come along to combination with equities. Those bank wanted to combinate equity finance with debt loans. I think its good collaboration.

Tim: It is interesting. We have seen more and more of this type of financing in Japan, this mixed financing. But in your case, it was driven by the investors wanting to structure it this way, rather than you and the team wanting to structure it this way.

Masa: Yeah. Like you said, the crunch editor said its unique scheme. In Japan step by step, those scheme or write it, I think.

Tim: Yeah. There’s definitely been seeing a growing trend at later stage investments. So, that is interesting.

Masa: Yes.

Tim: Hey, let’s get back to talking about the Japan market and Chat Commerce. I’m going to throw some statistics at you. So, Chat Commerce globally was a 41 billion market in 2021. It’s expected to grow to 290 billion by 2025. Now that’s awesome. But China, Japan, South Korea account for more than 90% of the entire Chat Commerce market. Why? I mean, this works, it’s converting. There’s so much commerce being done here. Why is it just Japan, China and South Korea?

Masa: Yeah. It’s very exciting point. First, WeChat invented this area, social commerce, conversational commerce and chat commerce and made opposite WeChat.  WeChat become separate but meta separated those app. Example, faster time Facebook app included messenger, but Facebook separated messenger apps and Instagram, WhatsApp separated. But WeChat applications include old application, so called super app and line have tracked this WeChat economies and in Korean market have Naver. Naver is near line platform and Naver also track WeChat. So, WeChat is origin and the line platform and the Naver.

Tim: Okay. So, it was really just the dominance, the solid WeChat platform in China and well, and rest of Asia to a lesser extent and the solid line platform in Japan and South Korea, that’s driving it.

Masa: Yes. So, this super app had a very big power and influence for eCommerce companies, especially China market and Japan market and Korean market connect social commerce, and Chat Commerce on those super app is very important strategy for next labor marketing because third party cookie ban and many eCommerce companies decrease investment on Google, on search engine. So, more and more focus on super apps.

Tim: So, is this something that you think will work overseas? So, like one of the things when you announce the investment, you talked about the fact that you’d be using these new funds partially for international expansion. So, obviously you think this will work overseas too, right?

Masa:  Yeah, definitely. So, now China and Japan and Koreans already have the product and the new economy of these areas I think. In US example today I met marketing the US team, social commerce or SNS marketing department. They said it’s very unique and from our own in US market, there will be many case studies and this market will spread from now on. So, now research Institute predicted a Chat Commerce market mainly in Asia market. But I think this experience can expand US or Europe or other areas, I think.

Tim: Okay. So, like before COVID, you guys were doing a little bit of business, you had some business in Taiwan and Thailand and the Philippines, these Asian, Southeast Asian countries. Is that your target for international expansion now? Or are you looking more at the US and European markets?

Masa: To be honest, I already decided to expand our business to the US market. So, I went to the US during one month and I met many potential customers and investors and the competitors. This product is very unique and/or potential client said they were very excited and on it now. So, Instagram and so SNS platform will connect with Chat Commerce and social commerce from now on in US so I already decided, but market is also very exciting.

Tim: Let me push back on that a bit, because I see this challenge that you pointed out earlier is if the reason for Chat commerce success in China, Korea, Japan has been the dominance of these chat focused SNS platforms like WeChat and line and the US, you know, Facebook, Instagram, it’s not chat focused, it’s not chat dominant. So, how are you going to fix that? How are you going to get around that?

Masa: Yeah. So why? Yeah, I understand the very interesting question. Thank you. Like you said until last year, the same situation, Instagram didn’t open API. So, we couldn’t provide conversational commerce experience on Instagram and Meta platforms. But last year Meta said next innovation where be conversational commerce or like Chat Commerce and open the API or Instagram this really recently. So, from that one, we can provide Chat Commerce experience on Instagram.

Tim: I guess what I want to ask is, so when I’m using line or WeChat, my brain is in kind of chat mode, right? I’m chatting with a person.

Masa: Yeah.

Tim: And when I’m using Instagram or Facebook or Twitter, I’m more in like a scroll mode. I’m not like thinking of interacting with one person. So, do you think that Facebook, Instagram is going to become more chat like? Or do you think that it’s just a big enough platform that this Chat Commerce will impact it?

Masa: Yes, yes. Yes. How user use this experience. For example, Mac Cosmetic Instagram account, they have 24 million followers. It’s very huge. And they often post a story and the user watch this and the click list and jump website. This is basically Instagram experience, but if they connect the Zeals, we provide new experience, user watch story and reply start to communicate with users on Instagram chat, very smooth and example what you are skin tone and several questions very easy. And a summarized suggestion for user.

Tim: I can certainly see how that would be a much more engaging, personal experience. And I noticed you’ve got a lot of cosmetic companies in your portfolio. It seems like health and beauty is a great target.

Masa: Yeah. Already it’s L’Oreal, Shisedo, Estee Lauder, top of the world cosmetic companies already use.

Tim: In this kind of Chat Commerce, the consumers who are chatting, do they always know they’re talking to a bot or do they sometimes think they’re talking to a person?

Masa: In fact user reply free text case under 0.1%. Very few.

Tim: That’s interesting. Because how does Japanese natural language processing compare to the state of the art in English language or in Chinese?

Masa: Yes. Yes. Yes. So, Tim important questions. So, our experience is smartly priced. So, smartly price user select bot and connect the next scenarios. So, those smartly price scenario based experience very important for Chat Commerce, I think. Yeah and the smart price is very unique as a country’s chat experience is mainly free text.

Tim: Right. Okay. I want to go back to the global expansion. Going global which is something people talk about so much in Japan among Japanese startups, but why do you think it is that still relatively few Japanese startup founders want to go global?

Masa: My ambition is Omotenashi revolution from Japan to the world. So, I want to expand the global market, improve raise Japan presence for global market so this question is important. To be honest investors affect this global expansion. To be honest, in Zeal’s case, someone of investors said stop, have to stop.

Tim: Okay. So, the Japanese investors are the ones discouraging founders from global expansion.

Masa: So in Japan case, there is a very few cases study to expand the global market. So, my hypothesis is investor maybe to interrupt expansions or not invest.

Tim: So, a lot of investors think there’s no good case studies of Japanese startups going overseas. So, they don’t want the startups going overseas. It’s kind of a chicken and egg problem really isn’t it?

Masa: So, most important. We have to make case study, success case study to expand the global market especially in the US market I think. So, we try to do IPO in NASDAQ until three years. There have been nothing to IPO in NASDAQ by tech start up from Japan.

Tim: All right. So, hopefully Zeals will be one of the first case studies of success in the US.

Masa: Yes. Yes. And if we do this many investors will change strategy. So, entrepreneur have the passion or motivation to expand the global market, but investor are not so many to have this motivation. But if we will, do we change totally thinking of investor I think.

Tim: I think so too. I think the mindset of the founders has changed much, much more quickly than the mindset of Japanese investors.

Masa: Yeah. So now if we start up, entrepreneur said we will do IPO. So, investor feel okay you will do IPO on topics. So, Tokyo stock market exchange it’s big now, but in the future, if entrepreneur said we’ll do IPO. Oh on NASDAQ?

Tim: Do you see that changing? I mean, do you see more Japanese investors being open to international expansion?

Masa: So, have you ever talked with investors?

Tim: Oh, many times all the time.

Masa: Many time. Yeah. Yeah. Yeah. How did you feel about investors global expansion insight?

Tim: I think our experiences are very similar. Most Japanese VCs are fairly conservative as far as VCs go. Doing a market entry, particularly in a market like the US, it takes a lot of capital. It involves a lot of risk. You’re not going to be making money from it for a while. So, I think most Japanese VCs, they view this as like, well, why are we taking on all this risk when we could have a nice safe IPO in two years and exit our position. And yeah, I hear the same thing that you’re seeing, but I think it’s changing. I think more and more Japanese VCS are becoming open to the idea of global expansion. Some of them are even encouraging it.

Masa: Yes. Yes. So, please encourage venture capital to invest strategy to global expansions and startup apps. 

Tim: Well, I will do my job on my side telling VCs to invest. And you do your job on your side becoming a role model by a big successful IPO on NASDAQ.

Masa: Yes, yes. Yes, definitely. I think it will change in the future.

Tim: All right. Well, I’m looking forward to that. All right. Listen, Masa, thank you so much for sitting down with me today. I really appreciate it.

Masa: Yeah, me too.

Outtro

And we’re back.

The more I think about Chat Commerce, the more excited I get about it. Right now is clearly very early days. And advances in machine learning, AI, and natural language processing are going to completely transform how Chat Commerce works over the next couple of years.

But at its core, this is a new kind of online advertising. Not because of the technology, but because of the channel. Chat or actually messaging is fundamentally different from display search, video, email, or almost anything else we have today. The difference is that with messaging, you need to opt into the relationship with each individual advertiser and you can disconnect and end that relationship at any time. With the users in control, the advertisers need to behave themselves.

And the result is a much, much more enjoyable experience for the user. If you have any doubt about this at all, compare the user experience of line to that of Facebook. Direct connection and opt in incentivizes good behavior and as we’ve seen shares clicks and likes incentivize bad behavior.

Of course, Chat Commerce won’t work for top of the funnel branding and awareness building. But, you know, that’s only a small part of most advertising budgets.

So, this might be the start of something genuinely new and I sincerely hope it is. Not just because I hope Masa and his Zeals team are hugely successful in their US market entry and hit their IPO target. But because I think it would be amazing if Japan could help start an advertising revolution. A new kind of advertising that is based not on inserting ads between the users and their desired destination, but one based on, well, based on Omotenashi. Based on building and maintaining productive, satisfying relationships.

That would be a much better world. 

 

If you want to talk more about Chat Commerce or Omotenashi, Masa and I would love to hear from you. So, come by disruptingjapan.com/show 195, leave a comment and let’s talk about it. And hey, if you like the show, please leave a review on iTunes or your podcast platform of choice, share a link on social, or, you know, just tell a friend about it.

But most of all, thanks for listening. And thank you for letting people interested in Japanese startups know about the show.

I’m Tim Romero. And thanks for listening to Disrupting Japan.